Lexin Resources bankruptcy leads to millions in rising costs for Orphan Well Association

The cost of looking after hundreds of wells, pipelines and other oilfield gear left behind by bankrupt Lexin Resources Ltd. has exceeded $2 million and the bills continue to roll in, says Alberta’s Orphan Well Association.

The association was handed responsibility for nearly 1,100 wells plus associated equipment after the Alberta Energy Regulator took the unusual step last February of shutting down all Lexin operations.

The AER accused the Calgary-based oil and gas producer of ignoring orders and regulations and forced it into receivership, claiming it owed more than $1 million in levies to the OWA and another $70 million in security for its reclamation obligations.

At the time, OWA chairman Brad Herald estimated it would cost about $1 million to administer the assets for six months until the ones with value are sold to new owners — but he said the actual costs have more than doubled as the process enters its ninth month.

“It’s taking longer than we thought,” he said Thursday.

“We’re still sitting with all that inventory and the carrying costs until the sales process is over, then we’ll have a view as to what the (final) liability might be. Not all of that Lexin property will move in the sales process so, oh yeah, it will be certainly north of that ($2 million).”

Property that isn’t sold will likely revert to the OWA, an industry-funded body assigned the task of cleaning up oil and gas wellsites for owners who can’t or won’t do so.

Executive director Lars de Pauw said OWA is spending about $100,000 every month to maintain the Lexin properties.

He said OWA had spent a total of about $1.2 million as of last month, with about two-thirds from hiring contract staff to complete well inspections, replace Lexin signs with OWA signs, talk to landowners and perform routine maintenance.

The accumulated bill will swell by an estimated $900,000 when a project is completed to purge a pipeline leading to Lexin’s closed Mazeppa sour gas plant near High River, about 60 kilometres south of Calgary, he said, and by another $150,000 to bring facilities into compliance with provincial regulations.

It will grow again when the costs are calculated for retiring and cleaning up two wells on the southeast edge of Calgary, rated a priority because the gas they produce contains poisonous hydrogen sulfide.

Court papers regarding the shut down Lexin. The Alberta Energy Regulator’s rare decision to shut down Lexin came after the company raised doubts it could ensure the safety of its sour gas wells. It had also failed to comply with a series of orders to properly maintain its properties.

The OWA has a budget this year of $30 million, paid by industry through an annual levy. Herald said looking after Lexin’s assets means it will do less than expected to clean up other orphan oil and gas properties.

Grant Thornton, Lexin’s receiver, says in updates posted on its website the process to sell the assets has been held up while the Alberta Court of Queen’s Bench considers the validity of certain ownership claims by parties related to Lexin.

It notes that the court assigned Lexin into bankruptcy last month with Grant Thornton named as its trustee.

When the Alberta regulator shut down Lexin last spring, it said it didn’t know how much oil and gas it was producing because it hadn’t filed reliable reports for nine months.

Herald welcomed news Thursday that the Supreme Court of Canada has agreed to hear an appeal from the AER seeking to overturn a ruling that could allow insolvent energy companies to walk away from cleaning up abandoned oil wells.

He said OWA’s inventory of orphan wells has grown dramatically since April when the Alberta Court of Appeal backed a 2016 court ruling that proceeds from the sale of insolvent Redwater Energy Corp. would first go to creditors and not toward the cost of cleaning up the company’s operations.

He said the decision has resulted in “significant incremental costs” for OWA.

The Redwater case doesn’t directly affect the Lexin situation because it’s hoped most of Lexin’s assets will be sold to other companies and not result in cleanup costs for OWA.